David has a fascinating discussion with Kristof Gleich about active management, indexing, and how ETFs and mutual funds really work.
Topics covered include:
- Should individual investors even try to select active mutual funds
- Is there an indexing bubble
- Why are there so many new ETFs
- Should we be worried about an ETF flash crash
- What do ETF market makers and authorized participants do
- Do SEC yields for international equity mutual funds and ETFs reflect the impact of dividend withholding taxes
As the president and CIO of Harbor Capital Advisors, Inc. Kristof Gleich oversees all Investment, Distribution & Marketing and Executive Office functions at Harbor. He provides insight while helping lead Harbor’s strategic growth plan.
Previously, Kristof was a managing director and global head of manager selection at JP Morgan Chase & Co. He has a degree in Physics from University of Bristol.
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it and how to live without worrying about it. I’m your host, David Stein. Today is episode 426. It’s titled “Active Versus Passive ETFs Versus Funds.” Now, that’s just a working title, so don’t be alarmed if we change it when we release the episode.
Today we have a frank, engaging, and enjoyable conversation with Kristof Gleich, who is president and CIO of Harbor Capital Advisors. Harbor Capital has been partnering with institutional active managers to run mutual funds for over 35 years, including the Harbor Capital Appreciation Fund that we used when I was an investment advisor. That fund is supervised by Jennison Associates, one of the firms that was on my former firm’s, FEG Advisors, recommended list. Harbor Capital also runs a number of ETFs.
We get pitched for interviews dozens of times per week, and pretty much turn every one of them down, because doing interviews isn’t our preferred format. In this case, I agreed to the conversation with Kristof because I had some technical questions on the underlying plumbing of ETFs and funds that I just hadn’t been able to get definitive answers.
I got those in this episode, but we also touched on a wide variety of other topics, such as when and how should individual investors use active managers? What is changing with ETFs and funds? And should we be worried about an ETF flash crash? We covered many other things. I think you’ll learn a ton about what’s going on with ETFs and mutual funds in this episode.
Just a brief bio on Kristof. As president and CIO of Harbor Capital, he oversees investment, distribution and marketing and executive office functions at Harbor. Kristof also leads Harbor’s strategic growth plan.
Previously, Kristof was a managing director and Global Head of Manager Selection at JP Morgan Chase. He has a degree in physics from the University of Bristol. Let’s go ahead and get on with our conversation with Kristof Gleich.
David Stein: Kristof, it’s great to have you here. I’m a longtime supporter of Harbor Mutual funds. Back in my institutional portfolio management days we used the Harbor Capital Appreciation Fund, and we actually also had some separately managed accounts with Jennison Associates, who is the sub-advisor for that fund. I’ve been on-site to their offices several times.
And so you know mutual funds, and Harbor is known initially for their active mutual funds, many of which had been very, very successful over the long term. But most active mutual funds don’t do that; they trail their benchmarks. And even the good ones, such as the Harvard Capital Appreciation, go through long stretches of underperformance.
I think I looked at that fund, I think it’s lagging over the past five years. Which can be frustrating for institutional managers having worked with endowments and foundations. Their patience seemed to be on average about three and a half years of underperformance, and then they’re ready to fire. Individuals, in some ways, can be more patient. But given how hard it is to find an active manager that outperforms, should individual investors even try to do so, or just stick to index funds, or ETFs?
Kristof Gleich: Great. Well, thanks for having me today. It’s great to be here; looking forward to this conversation. So let me just back up a quick bit. You mentioned Harbor there as well, and you’re a previous user of our funds, which is great to hear.
But just for your listeners, Harbor was kind of set up to answer that question of like how to pick managers. Because out of the gate, I want to say picking managers is really hard. We’ve been at this now for about 40 years, and our firm is about 200 people. And what’s our role—our dedication is to go out across the world and find managers that we believe in, that we believe can generate value for our investors over the long run. And I’m going to emphasize long run.
And we do that, and we find managers of the different shapes and sizes, and different stripes, with different expertise, and we try and we spend a long time understanding them, underwriting them, and ultimately investing with them. But we also pass up on most managers that we meet with; so if we meet 100 managers, we might pick one at the end of the day that we invest in.
So what I would say is in investing I think balance is key, and anything done to the extreme generally is to the cost of the end investor. And so I think if a portfolio is all tilted towards active management, it’s going to do worse than a portfolio that has a balance of index funds, and a balance of active funds. And likewise, if a fund is all tilted into index funds, I think that’s taking it to the extreme as well.
And so I do think that one of the challenges is there are periods and regimes that can last a long, long time. So for example, take where we are today, in the 2020s; I believe that returns are going to be harder to come by. It’s certainly proving that way so far. And indices, or index investing is probably not going to be the same experience as it has been over the last 10 years prior to this period.
So I recommend that listeners kind of have an open mind for that, that we’re in a different regime, and we believe there’s a role that active managers can play in a portfolio if they’re thoughtfully blended with index funds.
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